What to Consider When Refinancing a Mortgage

by Sean Bryant on June 24, 2012

With interest rates at all time lows, many people are looking into refinancing their mortgages to take advantage and lower their payments. Right now, it is possible to get a rate below 4% for most loans, which is unheard of. However, before you jump on the mortgage refinancing bandwagon, make sure you consider the points below so that you don’t regret it in the end.

Fixed Rate vs. ARM

For the most part, you will get a lower initial interest rate going with an Adjustable Rate Mortgage (ARM). The reason is that the ARM loans more closely reflect the short term interest rates, which are lower than the long term rates. However, interest rates will rise in the future (they can’t stay this low forever), and when they do rise, you will see your monthly payment rise as well.

You can calculate the costs of a rising adjustable rate mortgage by using this helpful mortgage calculator from emortgage. If you find the cost of the loan getting up there – especially if it goes beyond what a fixed rate loan is costing you, you may want to consider just going with the fixed rate mortgage and being confident in what you will pay each month no matter what.

The Closing Costs

The other important thing to consider when refinancing are the closing costs involved. You want to make sure that refinancing is worth the cost – so make sure that you get a GFE with detailed cost breakdown.

Once you know the loan costs, you should look at how much the new loan will save you each month, and divide that by the closing costs. For example, if the closing costs are $5,000, and you will lower your payment by $200 each month, it will essentially take 2 ½ years to cover the closing costs. Make sure that you will stay in your home during that time so that you recoup the refinancing costs and save money going forward.